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Ageing population triggers debate on GDP growth, interest rates

Chinese elderly playing Mahjong in a public park in Shanghai. The biggest question with regard to ageing and investment may be whether the demographic process spurs additional developments in labour-saving techniques and automation.

PHOTO: AFP

Singapore

THE unique challenges presented by the global ageing trend across several large countries have thrown up a debate over whether slower labour force gains would weigh on economic growth enough to lower interest rates, a fresh report from JPMorgan Asset Management showed.

The question over the impact of such seismic demographic changes comes as the global ageing process is set to not only gain in pace, but also synchronise in the coming decades.

The report analysed the impact of the ageing population in four significant markets: the US, Germany, Japan, and China. All in, these economies make up 50 per cent of global gross domestic product (GDP), and contribute to 55 per cent of global gross savings.

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Discussed during JPMorgan's international media conference this month, the report showed that as more workers retire and the workforce growth slows, the demographic change can act as a source of downward pressure on economic growth and thus, equilibrium interest rates.

But as with most things, it gets complicated because there will also be a large ageing-driven decline in savings, estimated to be equivalent to about 2.6 per cent of GDP from the four major economies, over the next 30 years. As people age, the savings will be spent over the retirement years. This could, in turn, drive real interest rates higher.

The extent of change in rates amid this dramatic demographic shift will depend on the response from other actors. Government may shore up savings to make up for future entitlement obligations, while businesses may take on less debt to buffer against an anticipated future of slower growth.

The report also suggests that as China grows, the contribution to global saving flows may also increase significantly. China squirrels away nearly 40 per cent of its income currently.

The biggest question with regard to ageing and investment may be whether the demographic process spurs additional developments in labour-saving techniques and automation. This would support investment spending, rather than depress investments as a response to lower trend growth.

"These crosscurrents make it difficult to predict whether we will see a strong reversal of the global savings glut and a corresponding upswing in interest rates," the report said.

"What is clear, though, is that the accelerating and increasingly globally synchronised nature of demographic change will put this hypothesis to the test in the coming decades."